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Lecture 05

The competitive environment

Hamilton and Webster (2015) chapter 3;

also: Module D.L. Pack , unit 4, p.64 -79
 LEARNING OUTCOMES
Following the completion of this unit you should be
able to:
• Discuss the different ways in which markets
may be structured, and how each structure is
likely to affect businesses in that market.

• Describe the ways in which governments may

act to create what they consider to be
appropriate levels of competition.
 Summary
• Introduction- Porter’s Five Forces
• Industry/market distinction
• Defining the market
• Market types:
– Perfect Competition, Monopoly, Oligopoly,
Monopolistic Competition……..
• Measuring market concentration
• Competition policy and legislation
• Privatisation and competition policies
 Introduction

Porter’s Five Forces Analysis, source Porter, 2008.

The Industry/Market Distinction

An industry comprises all firms producing

similar goods or services.

A market is defined in terms of the

demand for similar goods or services
 International Industrial
Classification Systems
1. ISIC - set up by the United Nations
2. NACE – established in the EU
3. Various national systems: UKSIC (UK),
JSIC (Japan)

3. NAICS – operational in the US,

Canada and Mexico
 Defining the Market

Need to identify:

• which products to include

• which firms to include

• the appropriate geographical area

 Which products?

Theoretically:
Competitor products
– with high cross-elasticity of demand

Practically:
• identify which firms are responding to
each other’s actions
• identify which firms act as a constraint
on each other’s actions
Geographical Definition of the
Market
To what extent does a price increase in
one area:

• attract competition from firms elsewhere

• drive customers away to cheaper areas

 Types of market

• Perfect competition

• Monopoly (and monopsomy)

• Oligopoly (and duopoly)

• Monopolistic competition
 Market Structure
Highly Competitive High Degree of
Market Power

Perfect Monopolistic Oligopoly Monopoly

Competition Competition Supermarkets Gas
Farming Restaurants Banks transmission
Stocks Small Builders Electrical Goods Water
Currencies Solicitors Electricity
transmission
Landline
telecoms?
 Perfect competition
Defining Characteristics
• Large number of sellers and buyers
• Homogeneous (identical) products
• Perfect information
• No barriers to entry or exit
• Buyers and sellers are “price takers”
 Monopoly

Defining characteristics:

• Only one seller

• No substitutes

• High barriers to entry

 Monopolies in practice
Theory: high prices, little choice and little innovation.

Practice:
• ‘Economies of scale’ or ‘contested markets’ can lead
to lower prices

Make a note of and look up any terms

that you don’t understand!
• Greater choice?

• Innovation and investment?

 Oligopoly
• small number of large firms
• barriers to entry
• homogenous or highly
differentiated/branded
• Potential for collusion
• Potential for high profits
• price stability and non-price competition
 Oligopolies in practice
Sector/product group Output from the largest five
companies (UK 2006 or latest)
(%of total output)
Cigarettes 99.5
Chocolate confectionary 86.0
DIY retail 86.4
Motor insurance 63.3
Motorcycles and scooters 64.2

Household cleaning products 62.0

Source: Mintel International Group Ltd (2006) Mintel reports (various)

adapted from Griffiths and Wall (2008) Economics for Business and
Management, Pearson Education Limited p. 226
 Duopoly
• Industry dominated by two large firms
• Market leader
• Price leader
• Barriers to entry
• Non-price competition
• Potential for abnormal profit
 Monopolistic competition

– Many buyers and sellers

– Some degree of control over market
– Differentiated products
– Relatively few barriers to entry

Do not confuse ‘monopolistic competition’

with ‘monopoly’
 Market Structure
Highly Competitive High Degree of
Market Power

Perfect Monopolistic Oligopoly Monopoly

Competition Competition Supermarkets Gas
Farming Restaurants Banks transmission
Stocks Small Builders Electrical Goods Water
Currencies Solicitors Electricity
transmission
Landline
telecoms?
Figure 9.2: Structure, conduct and performance factors
Revise your basic microeconomics!
Revise your basic microeconomics by going to the
Bized site.
http://www.bized.co.uk

Or go straight to the economics index

http://www.bized.co.uk/learn/economics/index.htm

Here you will find presentations on all the basics of

micro and macro economics, including slides on
markets structures.
 Workshop 05
• In workshop 5 we will consider
applications of market/industry structure.